European politics

EU Summit

The kiss of life, or of death?

SOME in the Irish opposition are already calling it the “Judas Kiss”. Angela Merkel, the German chancellor, greeted the Irish prime minister, Enda Kenny, with a kiss at the start of the European summit that ended today. But then she betrayed his hope that the euro zone would lift at least some of the burden of saving Ireland’s banks from the shoulders of the Irish sovereign.

At the end of the summit, the French and European officials had claimed a points victory over the Germans by getting them to agree more firmly to a target date of January 1st next year to entrust the European Central Bank (ECB) with the ultimate authority to supervise the euro zone’s 6,000-odd banks.

The importance of this “Single Supervisory Mechanism” (SSM) is that, once up and running, and deemed “effective” in the course of 2013, the euro zone’s rescue funds could start directly recapitalising troubled banks. When the deal was first agreed in June, Spain hoped this would save it from taking on more debt to salvage its banks, and Ireland had been led to believe it could benefit retroactively.

The Taoiseach, or prime minister, Enda Kenny, left Brussels in upbeat mood, insisting that EU leaders had given a clear reaffirmation of the June promise. And the Spanish prime minister, Mariano Rajoy, declared himself to be “very satisfied”.

But down the corridor, Mrs Merkel was quickly disabusing them. “There will not be any retroactive direct recapitalisation,” she said, “If recapitalisation is possible, it will only be possible for the future.” In the case of Spain, she said, the timetable is such that “when the banking supervisor is in place we won't have any more problems with the Spanish banks, at least I hope not.” The problem of Spain’s banks would be dealt with by euro-zone loans already approved earlier this year. By implication, Ireland would also have to lump it.

Her comments inverted the familiar cycle of European summits: leaders arrive in a climate of crisis, and leave after having decided action that, they hope, will control the fire. This time they gathered in Brussels with markets relative calm, but left in disarray.

One senior eurozone source claimed, improbably, that the issue of recapitalising Spanish and Irish banks had, in fact, not been discussed directly. Instead the leaders debated the preliminary steps needed to get to the stage of direct recapitalisation. Many issues remain open and were left for finance ministers to settle in the coming months, not least how to deal with "legacy assets". But the source added: “Mrs Merkel’s declaration is a surprise for me. She is prejudging decisions that ministers of finance will take.”

Germany often worries that easing market pressure on troubled countries will dent their zeal for budgetary and economic reforms. But this week the feeling is that the reduction in bond yields in recent weeks had blunted Mrs Merkel’s readiness to fix the flaws of the euro zone – not least because she is entering her campaign for re-election in autumn next year.

Some diplomatic sources think Germany’s stance is a negotiating position, and that direct recapitalisation of Spanish and Irish banks will eventually take place – though perhaps not before the German election. If such measures did not apply to Spain and Ireland, say Eurocrats, to whom are leaders referring in their communiqué restating that “it is imperative to break the vicious circle between banks and sovereigns”?

The Spanish prime minister at least had the foresight to sense the obstacle: he said that having to take on another €40 billion worth of bank recapitalisation on to its books, or about 4% of GDP, was "not the biggest worry”. Instead he welcomed the evidence that the euro zone was moving towards banking union.

A more immediate question is whether Mr Rajoy will formally seek a wider bailout from the rescue fund, the European Stability Mechanism. This would come with strings attached (how onerous remains unclear) but would activate the commitment by the ECB to intervene in bond markets to bring down Spain’s borrowing costs. Mr Rajoy must calculate whether the relief is worth the political humiliation and, more importantly, be sure that it would not be blocked by sceptical German leaders. Both sides may be still hoping that the gradual but steady narrowing of bond spreads in recent weeks (see the charts in my earlier post here) will obviate the need to ask the restive Bundestag for more money.

Though ostensibly “independent”, the ECB president, Mario Draghi, participates in European summits and proved instrumental on setting out a clearer timetable. “He is the only expert in the room,” says one source.

Another thorny problem is how to reconcile the ECB-linked supervisor with the interests of the ten EU members who do not use the euro.

Most want to take part in the system, but fear they will be left without a voice as the treaties give decision-making power to the ECB’s governing board, from which they are legally excluded. The strategy will be to create a supervisory arm where euro-outs will enjoy “equitable treatment and representation”, as the conclusions put it.

But Britain is principally concerned with not being over-ruled by a giant euro-zone supervisor, carrying the weight of 17-plus EU members, in the European Banking Authority, which co-ordinates supervisors’ work and sets rules.

Part of the summit was taken up in a row about the impact of a proposed new budget for the eurozone on current negotiations for the EU’s regular seven-year budget.It had been sparked off by comments in recent days by the British prime minister, David Cameron, who appeared to argue that the proposed "fiscal capacity" for the euro zone reduced the need for an increase in the EU's budget, to be fought over at a special summit next month (Mr Cameron said he was ready to veto a budget deal he did not like). The communiqué insisted any “fiscal capacity” for the euro zone would be “unrelated” to the EU budget.

The “fiscal capacity” will be part of a final report to be submitted by Herman Van Rompuy, who presided over the summit, setting out a “specific and time-bound roadmap” to fix the euro zone’s flaws. But nobody expects it to be the final report on reforming the euro zone, and there is a growing belief that the EU will have to start renegotiate its treaties some time in 2014.

David Cameron, the British prime minister, seized on these momentous changes to argue that Britain’s relationship with the EU would also change, though he insisted that membership of the EU was in Britain's national interest:

Am I happy with the status quo in Europe? No I am not, I think there are changes that we need. There are opportunities opening for what I have said should be a new settlement between Britain and Europe and there will be opportunities to seek that new settlement.

It is a state of mind that is worrying liberal-minded allies of Britain. Finland's Europe minister, Alexander Stubb*, told Reuters:

I think Britain is right now, voluntarily, by its own will, putting itself in the margins. We see it in foreign policy, we see it in economic policy, we see it linked to the single currency. And I, as someone who advocates the single market and free trade, find that very unfortunate, very unfortunate.

* In an earlier version of this post I had mistakenly spelled Alexander Stubb's name as Studd. Sorry

As usual the blame game zeros in on the Germans as the economic bogeymen of Europe.

Here's a Middle American's view on the whole crisis..
The southern folks, PIIGS as they're called, got caught up in their own reckless fiscal mess and are now determined on making sure the blame lies anywhere except where it belongs. Squarely on they're own shoulders.

Simplistic observation to be sure, but isn't that what it boils down to?

Sometimes I really wonder if those fellows we call leaders are actually aware of the stake. I mean for them it really doesn't matter if EU survives or not, still they'll go to French Rivera without visas. Still they'll be able to ski in Alps without any problems, not mentioning nice cosy dinner on Cyprus. But for us things look a but different. No Eu no passportfree travel. No Eu - no transfer of services - can't sell my data analysis to universities outside my home country without enormous formalities. No Eu - no free trade of goods - no more my favorite Swedish herring delivered to my door. Well, with four words: No EU - no fun.
As pathetic as it sounds EU is actually the best thing that has happend to this content for the last 400 years, and it's reality pity that our British brothers can't see it.

@ Charlemagne: "Her comments inverted the familiar cycle of European summits: leaders arrive in a climate of crisis, and leave after having decided action that, they hope, will control the fire. This time they gathered in Brussels with markets relative calm, but left in disarray."

There is a sort of abstract beauty to the sublime stupidity of the German policy response to this crisis.

See what we have done they proclaim to an anxious world - we have resolved to make the euro safe for the next crisis (with our new banking union thingy)but we are equally resolved to let the eurozone disintegrate this time....

Your choice of image should be a warning to every reader who expects a balanced assessment of the latest events in the € saga: Of course, Frau Merkel is to blame again, the Germans are preventing the rescue of the Euro. Just about everybody else is being eminently sensible and if it wasn´t for the bloody Germans rescuing the Euro would be a piece of cake.
If Merkel is like Judas, thinks only of her purse and does not care about saving the world etc, who is your saviour then, the good guy?
Barroso the Irrelevant, Samaras the Ditherer, Rajoi the Slow ...? So many super-human contenders are fighting the Wicked Witch of the North.

Sorry, I can´t take you seriously anymore when you write about the €-crisis.

In the recent EU meeting we have seen the nice attempt to pass on retroactively the debt of bankrupt countries in Europe to the solvent taxpayers in Europe. This is close to fraud and sin. But the beginning of fraud and sin was to save banks. For nationalists in Europe with an inferiority complex towards Germany, the whole mess is a welcome opportunity to sow discord. The solvent countries in Europe are helping. But you can not demand that they pay for everything.

As long as they keep meeting with a commitment to keeping the Union, trying to find a way of sustaining it it is still the "kiss of life".
Then after the recurring tries and failures, bumping into the wall, and starting again, sooner or later they all arrive to the conclusion that they simply cannot dodge the full socio-economical integration, as a solid building needs solid foundation.
Of course if they were wiser they could arrive to the same conclusions even now, as there is more than enough information around that a simple economic or financial construct cannot survive without deeper union, and that banks have no true role in any solution.
Only time will tell whether we have to go through the whole "path of suffering" before they get the bravery to integrate or we switch over sooner.

Yes and no. What all boils down to is having Germans and a few other small nations (by "Germans" I mean the taxpayers) pay for everything Spanish, Greek, Italian, etc. For banks, national debt, etc. etc.
First, start talking about the war, than tell the Germans they are guilty by default, THUS they need to pay.
The problem is that the PIIGS succeed.

In essence, the Germans said OK we'll agree to centralised bank recapitalization but for the next crisis, not this one. In the mean time we want a veto over all your budgets. Eventually the wheels will turn and the out-of-sync economic cycles will shift to a new phase. 10 years down the road when the German banks are struggling with the aftermath of the property bubble that is happening now they will benefit. And just like the Maastricht criteria, when the Germans break the rules, the rules will be quietly forgotten. All assuming the Eurozone still exists of course.

It seems that the Economist seeks to become the "National Enquirer" of business and economics reporting. National Enquirer being at the bottom of the heap of American tabloids, and something which one would hesitate to place under the backside of one's puppy.

The Economist also needs to substantially improve that which comes after its bizarre headlines.

"As an indispensible prerequisite to full union . . . the American people agreed that the individual states would delegate to their new federal government the exclusive right to issue sovereign debt; and at the same time the federal government assumed all outstanding state debts".

The federal government had the exclusive right "to issue debt and assume all outstanding state debts"??

LOL! The federal government had the right to "assume" and "issue" debt . . . and to repay the "assumed debt" out of nowhere, on a wing and a prayer! What hogwash, viva!

The "indispensable prerequisite" needed for "assuming" the debt of others was, in the first place, the U.S.' congress' exclusive right to impose taxes throughout the union territory!

U.S. Tax Code "Power to Tax and Spend".

Clause 1 reads. "The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States".

The anti-Euro trolls will not stop pollute these pages with their feeble arguments. Let us briefly summarize their repetitive arguments:

-Japan accumulated debt of 212% of GDP is caused by the excessive spending not covered by the tax revenue.
-USA accumulated debt of 103% of GDP is caused by the excessive spending not covered by the tax revenue.
-UK accumulated debt of 86% of GDP is cause by the excessive spending not covered by the tax revenue.
-Singapore accumulated debt of 101% of GDP is cause by the excessive spending not covered by the tax revenue.
-EZ accumulated debt of 87% of GDP is caused by a SINGLE CURRENCY.

Isn't this a feeble minded and self-serving argument? Why would you eliminate a currency that captured 30% of the world’s reserves?

I should qualify my position on the EU though...the EU political organs, incompetent and burdensome bureaucracy should be dismantled, it will not work and in the long run that is what eventually will happen – no need for the additional layer of government and taxation (sorry Theo and Pumper). I am for the ECONOMIC UNION based on private ownership and market driven and that includes the single currency. Euro is/can be administered by the prudent monetary policies independent of the 40 thau bureaucrats in Brussels.

Without Euro, Europe will remain a patsy of the US$. Why the UK supports the political union and not the single currency is beyond reason? What is so special to have the ability to devalue Pound but inability to strengthen?

Actually so far it's quite the opposite, the bankrupt UK government to save itself and its extremely over leveraged private sector decided to to try to save itself by QE and subsequent Pound devaluation against the Euro.
In simple terms the British parasites are leeching the PIGS and France in order to survive.

Milovan, you turn into a true idiot sometimes. You write "You Germans have never forgiven *us* for provoking the defeat of Germany in WWII.".
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"us" who? you maybe, not me. I for one hate and curse the Italians of seventy years ago, responsible for every kind of massacre in Slovenia, Croatia, Albania, Greece, Libya, Ethiopia, not to mention the fact that they were ideologically jointly responsible of the destruction of the Jews of Europe. Try to think before writing such rubbish.

Who makes up these headlines? Unbelievable. A magazine such as the Economist would be expected to know that if you commence on such a magnificent project such as the EU that nothing is for free. Enormous changes are taking place in the EU. Enormous discussions. Finally!!!!

But these scare mongering and populist headlines help nobody.

Make up some realistic headline. "Foreign Affairs" would be a nice example.